Abstract:

In the wake of the 2008 global financial crisis, first, and of the 2011 European financial crisis, and second, important changes have been brought to the European banking regulatory framework. Banking capital requirements (capital adequacy ratios) have been tightened on a global scale - through the “Basel III” agreements. New liquidity and leverage requirements have been imposed on all European banks, to strictly curtail risk and indebtedness, rightly identified as two significant causes of the 2008 financial crisis.
As for any case of regulatory tightening, these changes in banking regulation have been resented by the regulates as excessive constraints on banks’ business - in particular their lending business, especially small and medium-sized firms, which have little access to capital markets, because of significant information asymmetries characterizing credit relations.
In this paper, we aim to analyse the implications of these modifications in banking regulation which tend to favor banks organized in the form of joint stock companies to the detriment of banks organized as non-profit enterprises such as credit cooperatives.
Thus, the question we are addressing in this paper is the following: to what extent have recent European banking regulatory changes affected regional economic development? We will answer the question by analysing descriptive statistics concerning the structure of the banking system and credit supply in two countries, Italy and Germany. These two countries share important characteristics, which underline the relevance of a strong nexus between banking sector development and growth on a local scale. In particular, both countries are characterized by a high number of small and medium-sized firms and both have a fragmented banking system, with a sizeable number of not-for-profit and local banks.
The hypothesis formulated here is that changes in banking regulation can affect local and regional economic development through two channels: a first, direct channel, through which regulatory changes directly and negatively affect banks’ credit supply to small and medium-sized firms; and a second, indirect channel, through which regulatory changes induce changes in the structure of the local and regional banking system, which, in turn, affect (among other things) credit supply. A comparison between Italy and Germany will allow us to assess the relative strength of these two channels, identify those factors, which may allow us to explain outcomes differentials, and thus help identify policy implications.